Teach your kids about money: 9 dos and don’ts

Most Americans don’t have a rainy day fund, haven’t saved enough for retirement, and aren’t prepared to fund their children’s college education, according to a 2009 survey from the FINRA Investor Education Foundation. How can we prevent future generations from making the same mistakes? Teach kids about money. The US Department of Education has teamed up with the Federal Deposit Insurance Corporation and National Credit Union Administration to promote financial literacy in schools across the country. Parents have a role, too. Here are nine do’s and don’ts to get your children started

1. DO: Have the conversation

The biggest money mistake parents can make is not talking about it with their kids, says Karyn Hodgens, a mother, co-founder of Kidnexions, a website for children’s personal finance in Rocklin, Calif., and author of “Raised for Richness: Teaching Kids Money Skills for Life.” “It’s one of the most important things to teach our kids, so that they can become self-sufficient, responsible, and productive later on.”

Parents don’t have to be financial experts to teach the basics: the importance of saving, budgeting and goal setting. Nor should parents ever forget that their actions, regarding money and everything else, serve as constant examples for their offspring.

2. DO: Start teaching kids early

Children start learning about money well before a parent or teacher begins formally teaching them. “The money messages that we send to kids start at a very early age, as early as two or three,” says Ms. Hodgens. “We teach by the way we choose to spend money, in the way we react when our kids want something, and so forth.” Parents should initiate a formal education when their kids start kindergarten, start with the basics, and move on to more mature money matters, credit cards and investing, for instance, when they hit their teen years.

3. DO: Give them an allowance

The best way for children to learn is through active involvement, says Hodgens. “If we want our kids to learn money management skills, we need to give them money to manage. An allowance is one of the easiest ways to do that.” An allowance shouldn’t be free money. “It’s not an entitlement. There are strings attached,” she adds. She advises parents and children to draw up a contract that explains what the kids will now be responsible for paying for with their weekly allotment.

4. DON’T: Tie allowance to chores

There are two schools of thought on the matter: the first, to reward children for doing household chores with an allowance, and the second, to keep chores and allowances separate. Hodgens falls into the latter: “If you tie them together, you lose consistency. Your kid might decide one week that doing chores isn’t worth the money.”

Children still need to learn how to earn money though, so “an allowance should be enough to cover most of their expenses, but not all,” says Hodgens. Parents can offer kids paid jobs beyond daily household duties, like washing the car or mowing the lawn, for which they’ll earn extra money to put away for that new iPod.

5. DO: Give them spending responsibilities

With an allowance and extra earned money, kids should learn the difference between needs and wants – a distinction that makes itself clear once their own money is at stake for that impulse grocery store treat. Regardless, parents need to let their kids make the decisions about their money. “Sometimes you want to step in and say ‘That’s not a good idea,’ but one of the best teaching tools parents have is letting kids make mistakes, reflect on them, and then figure out how to do it differently in the future,” says Hodgens. It goes without saying that money mistakes made as child are usually far less costly than those made later in life.

Here’s another tip for teaching responsibility: When it comes time to buy back-to-school clothes or other necessities, give “tweens” a predetermined amount of money, in cash, and let them decide how to disperse it. “When it’s gone, it’s gone. Kids will become very, very picky and start looking for sales when they’re doing the buying,” says Hodgens.

6. DO: Show them how to balance a checkbook

As we become more and more removed from the physical part of money, the concept of balancing a checkbook by hand seems an unnecessary skill. Kids, and parents, can monitor their checking account balance online now. Still, financial experts attest the value of bygone ways.

“Even though many of us no longer manage our finances with old-fashioned hard-copy checks, it’s still important that we learn the concept of balancing a checkbook,” says Carrie Schwab-Pomerantz, president of the Charles Schwab Foundation, a San Francisco, Calif. based nonprofit with a mission to improve financial education. “Kids need to understand that they can’t [withdraw] more than they’ve put in, and need to have a system that will help them keep track.”

7. DON’T: Hide your financial troubles

In tough economic times, when parents may face pay cuts, even foreclosure or bankruptcy, instinct says hide it from the kids. Parents should always be open and honest with their kids, even when it comes to money, says Ms. Schwab-Pomerantz. However, they should keep a child’s age and maturity in mind when deciding how many details to reveal, and never scare them.

“Even if you have to tell them something really difficult – like that you’re going to have to give up your house – you want to let them know that you have a plan, and that the family will be okay,” she explains. “Be honest about the trade-offs or sacrifices you’ll need to make, but let them know that you will continue to take care of them.”

8. DO: Acknowledge the pros and cons of credit cards

Credit cards can mislead even grown adults, and bring on years of debt and regret. They are still a necessary part of life, and crucial to establish credit. But they can come off looking like free money to a youngster. Experts and parents have reached no universal agreement as to when teens, or even college students, should handle their own plastic. Nevertheless, pre-paid credit or debit cards are both tools for showing kids how to budget, and for emphasizing the discipline it takes to pay off a credit card every month.

9. DO: Encourage investing

Investing can be a great way to teach kids about long-term growth and risk. Make the bottom line clear: Only invest what you’re willing to lose. Financial experts encourage older children to invest – especially in companies they’re familiar with – but only after they do their research. A kid-friendly, low-fee, low-minimum investment mutual fund is a good start. Even then, kids need to know that there are no guarantees.